Parents Profit From Helping Young Home Buyers

January 12, 1986|By Changing Times

Parents don't have to sit helplessly by and watch a child struggle to come up with the financing to purchase a home. They can participate as co- mortgagors.

Under this arrangement, the parents are listed on both the title and the mortgage. (Parents can also take title with the children without becoming co- mortgagors.) If payments are missed, co-mortgagors must make them.

Parents can take the interest and property-tax write-offs for any part of the payments they make. However, in order to claim depreciation for tax purposes, both parties must enter into a shared equity arrangement.

That's the promise of a shared equity arrangement, in which co-owners may share the down payment, mortgage installments, taxes, insurance and maintenance costs.

One co-owner occupies the property and gets the tax breaks that go with homeownership. The other co-owner, as owner-investor, gets the tax breaks that go with owning investment real estate and has the right to share in any profits when the property is sold.

Both sides must enter into a contract that lays out the entire, complex financial arrangement.

The two parties can divide ownership interest 50-50 or in some other proportion. How ownership is split generally determines how appreciation and many of the costs will be divided. As for the down payment, the parents could supply all of it, none of it or something in between.

Some lenders will still require that the first 5 percent of the down payment come from the owner-occupant's own resources.

To protect their right to take depreciation in a shared equity deal, the parents must charge their offspring a fair market rent for the proportion of the home the offspring don't own. So even if your parents agree to take on half of the mortgage payment, most of the difference is still going to come out of your pocket in rent.

Monthly costs may be lower than under full ownership if your parents can legitimately charge rent that comes to less than their portion of the mortgage payment. Perhaps the fair market rent in the area is low enough to permit it. Your parents may also charge a lower rent if you take on all maintenance responsibilities. And you might point out that with you as a tenant they don't have to worry about vacancies, which should be good for a rent reduction.

You should be aware that a shared equity arrangement doesn't always work out to the owner-occupant's advantage after taxes are taken into account.

In a 50-50 deal, for example, if the rent charged is equal to half the mortgage payment, then the owner-occupant pays the equivalent of full mortgage installments but forfeits half the property tax and interest deductions. That could mean a higher cash outlay after taxes than if the occupant had carried the mortgage alone.

Hire a real estate attorney experienced in shared equity planning to draw up the papers, or seek the services of one of a number of firms that specialize in setting up such agreements.

The following companies have devised basic contract forms that can be used anywhere, with modifications where necessary to comply with state laws. They also provide other services, such as identifying lenders and working out financial

and tax analyses that show whether a particular arrangement is advantageous.